Business | Banking
Exchange houses in need of support from the banks
They want solutions to problems such as settlement of funds in multiple currencies, restrictions on opening branches abroad and catering to customer preferences for account transfers.
- By Gaurav Ghose, Financial Features Editor
- Published: 00:05 May 3, 2008
Casas de Cambio, or money exchange houses, along the US-Mexican border have in the recent past put some US banks under Federal probe on charges of alleged laundering of drug money.
Faraway incidents involving shady, unregulated money transfer companies have a negative, in fact a punitive, impact on money exchange houses everywhere.
That's so even for the UAE, which in contrast to their counterparts in South America are strictly monitored by the Central Bank, and are continuously making every effort to combat money laundering and terrorist financing.
To imagine that all exchange houses worldwide - good and bad, regulated and unregulated - can be put in the same basket is unjustified and needs to be addressed, say money transfer companies here in the Gulf.
"As exchange houses [of the UAE], we feel that we have been treated to some extent unfairly," said Mohammad Al Ansari, chairman and managing director of Al Ansari Exchange, during the Money Transfer Dubai Conference 2008, referring to incidents involving South American money exchange companies in the recent past.
"If it [a case of money laundering] happens to any bank, you will just get a letter from that bank that it has decided to close all accounts of non-banking customers worldwide. So if something goes wrong somewhere in the world, it affects all of us."
Money transfer companies and banks are slowly becoming competitors in the growing remittance business, though the former will probably continue to dominate. With over $10 billion in outward remittances from the UAE every year and expected to grow 10 per cent to 15 per cent annually, the increasing demand of retail money transfer from the Gulf will still largely be handled by the exchange houses, Al Ansari believes.
For banks, Al Ansari said the sheer volume of transactions that might have regulatory implications, the smaller ticket size, not being a high-income business act and having very strict regulatory oversight have long acted as deterrents to entering this industry. On the other hand, exchange houses have the advantages of location, timing and convenience, better customer service, lower charges and lower establishment costs.
However, the scenario in the Gulf is slowly changing, with migrant workers paid through the banking services.
"We are seeing that a lot of banks are being forced to take on these customers and they are thinking we can provide the same service," said Bhairav Trivedi, global head of remittances, Citi Global Transaction Services, at the same conference.
Trivedi, citing the example of Citi's remittance operations in the US, says the strategy is to offer transfer services so as to draw people in to value-added banking services. Banks, he adds, can afford to be very competitive in pricing. They have scale, and also have convenience and reliability factors.
But it is generally accepted that the banking industry has for long not been able to attract money transfer customers because of high fees. But there are other distinctions between the two segments, particularly in the kind of customers.
But as the two become competitors, Al Ansari said, it is important to realise that exchange houses require banks' support for a variety of reasons: for settlement of funds in multiple currencies; to overcome the restrictions on opening branches of exchange houses in other countries; for taking advantage of the wide branch networks of correspondent banks, and to cater to customer preferences for account transfers.
Banks, he adds, have been reluctant to consider exchange-house accounts because of the high risks associated with stringent regulations in some countries, the involvement of third-party transactions or what is essentially unknown customers, lack of confidence regarding anti-money laundering (AML) compliance by exchange houses, high penalties imposed by international agencies and fear of damage to their reputation.
Fear of hurting the bank's name - or what Trivedi calls "perception risk" - is huge.
"You have to realise that for a company with a market cap of maybe $150 billion there is headline risk. One article on the front page of the Wall Street Journal could potentially knock down one per cent of market cap, which could take away $2.5 billion in market value. For us to actually justify that why we are in business with someone who is not compliant or has some issues doesn't make sense."
Al Ansari countered by saying there could be a solution to this issue of cost of reputation.
That, he said, lies in regulators and international bodies categorising exchange companies based on measurable parameters such as compliance of AML requirements as per international standards, compliance with laws and regulations of parent countries and years in business and size of balance sheets.
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